Gross margin return on inventory

Gross margin in rupees divided by average inventory at cost: what a retailer earns in a year for every rupee tied up in stock. The shortcut of gross margin percentage multiplied by inventory turns works only when turns are measured on sales; with turns measured on cost of goods sold, multiply the markup on cost by turns instead.

A category with ₹100 crore of sales, a 35% gross margin and ₹13 crore of average inventory at cost earns ₹35 crore of gross margin on that stock, a GMROI of about 2.69. Its turns are 7.7 on sales and 5.0 on cost.

Category managers decide what to stock on this measure, because it captures the trade-off between margin and velocity in a single number. A low-margin staple that turns twenty times can outperform a high-margin item that turns twice.

It also explains retail assortment decisions that look irrational from outside.